PHILIPPINES ELECTRONICS

COMPONENTS MANUFACTURING 2017

STEPS TO REGAIN COMPETITIVENESS

Adnan Awan
Lucky Nurrahmat
Shijir Ochirbat
Alex Pham
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Contents
1. Executive Summary 3

2. Country Overview 4-7

3. Electronics Cluster 8 - 11

4. Cluster Competitiveness 12 - 17

5. Recommendations 18 - 19

6. Sources 20

1. Executive Summary
ELECTRONIC COMPONENTS CLUSTER
Electronics manufacturing is the most important industry
of the Philippines. Electronics exports from the Philippines
totaled US$28.6 billion in 2016, accounting for more than 50%
of the country’s exports. The industry has been an important
source of jobs and foreign direct investment, attracting multi-
national companies like Intel, Acer, Texas Instruments, and
Toshiba to invest in the Philippines.
PHILIPPINES OVERVIEW
The Philippines has been categorized as a lower middle
income country by the World Bank with a GDP per capita of
US$2,904 in 2015. This Southeast Asian nation has a young
population, advantageous location, and open economy
favorable for trade, but fragmented geography, natural disas-
ters, political instability and weak institutions have hampered
development.
CLUSTER PERFORMANCE
The economy of the country has transitioned from agriculture
to manufacturing and now to services. In the 1980s, agricul-
ture formed 1/4 of the economy. Agriculture now accounts for
only for 10.3% of GDP, while industry and services account for
30.7% and 59% respectively. The electronics cluster, which is
one of the most important industries, started developing in
the 1970s when electronics manufacturers from developed
countries began locating their operations in the Philippines to
take advantage of cheap labor and favorable location. Histori-
cally, the cluster has been dominated by foreign multinational
corporations with very little contribution of local firms.
GLOBAL COMPE TITIVENESS REPORT | 3
Photo Credit: ILFS Clusters
CLUSTER COMPETITIVENESS
While electronics manufacturing is one of the Philippines’
most competitive sectors, its global competitiveness has
declined between 2000 and 2010, which is a cause of concern
for the country. One of the major reasons for this decline is the
focus of the cluster on producing low value added interme-
diate components as opposed to high value added finished
products. Labor productivity has also not improved signifi-
cantly, and continues to lag the level of other regional econo-
mies like Malaysia, Thailand, or Singapore.
RECOMMENDATIONS
The Philippines government is aware of the challenges facing
the electronics cluster and plans to help it transition from low
value added components to high value added products. To
move up the ladder, we recommend that the government
should attract highly skilled Filipino engineers and techni-
cians from abroad through a special scheme and try to retain
them in the country. It should also promote a R&D culture
by increasing R&D investment and attracting leading multi-
nationals to perform R&D in the Philippines. The cluster
players, in coordination with the government, should focus
on improving the perception of the Philippines’ electronics
products which are currently perceived to be low quality.
Finally, more can be done to help the Philippines be promoted
as a high quality global “brand” .
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Photo Credit: Wikipedia Commons

2. Country Overview
GEOGRAPHY
The Philippines is an archipelago of 7,000 islands with a total
area of 300,000 square kilometers between the Pacific Ocean
and the South China Sea (World Bank, 2017).

The country has a long coastline with natural harbors like

Manila Bay. Its land is fertile and suitable for crops like rice,
corn, sugarcane and tobacco. Therefore, agriculture was the
main source of livelihoods until the 1970s. There are extensive
mineral deposits in the country, including metals like nickel
and copper and non-metals like clay, guano, asphalt, feldspar,
sulfur, talc, silicon, phosphate, and marble.

POLITICAL STRUCTURE
Politically, the Philippines is a republic with a presidential
form of government. Powers are divided among the execu-
tive, legislature and judiciary. Executive comprises of the presi-
dent, vice president and cabinet. The legislature is divided
into Senate and House of Representatives, and is responsible
for making laws. The judiciary comprises the Supreme Court
and lower courts. The Supreme Court also has the power of
judicial review and to declare any law, agreement or treaty
unconstitutional.

Figure 1. Population density of the Philippines (Wikipedia)


ECONOMIC OVERVIEW
During World War II, Japanese occupa-
tion destroyed much of the Philippines’
economy and infrastructure. Since
independence, the country has had
a checkered economic performance
and developed economically by fits
and starts. The economy suffered from
many problems common to other
developing countries, such as political
instability, corruption, poor macroeco-
nomic management, external debt, over
reliance on aid, inequality and crony
capitalism.
100 million
population
In 2015, the Philippines had a total
population of 100 million with a life
expectancy of 68.4 years, which is
below average for the region. However,
the Philippines, unlike China, Japan and
Thailand, has a young population which
speaks good English. This has proven
to be an asset for business process
outsourcing like call centers, software
development and back-office services.
Furthermore, 8 million Filipinos work
abroad and revenue from remittances
was US$30 billion in 2015.
The GDP per capita of the Phlippines
has quadrupled to US$2,904 in 2015
from only US$715 in 1990. However, it
still lags behind other countries in the
region like China ($8,069), Indonesia
($3,346), Malaysia ($9,768), Thailand
($5,814) and Singapore ($52,888). This
laggard status is particularly poignant
considering that the Philippines was
richer than these countries in the 1970s.
ECONOMIC HISTORY
After independence, the Philippines
became dependent on the United
States, its former colonizer, for recon-
struction and the revival of its economy.
As a consequence, the country had to
open its borders to American goods
in order to receive aid. This resulted
GLOBAL COMPE TITIVENESS REPORT | 5
in large trade deficits that forced the
government to impose capital controls,
restrict imports, and follow a policy of
import substitution during the 1950s.
This policy worked for some time
and growth in manufacturing sector
averaged 12% growth in the first half
of 1950s and contributed 7.7% to GNP.
However, manufacturing declined in
Figure 2. GDP per Capita (World Bank)
the second half of the 1950s, imports
increased, and there was corruption in
foreign exchange allocation.
The government was forced to reverse
the policy, devalue the Peso, and reduce
tariffs in 1962 to spur exports, helping
$2,640
GDP per
capita
to increase minerals and agricultural
exports. The efforts of liberalization by
the government, however, were met
with stiff resistance from industrialists
and the government re-imposed tariffs
in 1968 to give a boost to domestic
manufacturing.
The 20 year rule of Ferdinand Marcos
(1965-1986) had deleterious effects
on the economy of the
Philippines, especially
after the imposition
of martial law in 1972.
Marcos promoted crony
capitalism, which under-
mined healthy competi-
tion in business.
While the economy grew
on an average of 6.4%
in the 1970s, mostly on
the back of increased
commodity prices, this
growth came at a great
price for the Philippines.
The total international
debt of the country rose
from US$2.3 billion in
1970 to US$24.4 billion
in 1983. Debt servicing
became increasingly diffi-
cult, forcing the govern-
ment to renegotiate
and restructure its debt
several times.
This debt crisis increased
the influence of the World
Bank and International Monetary Fund
in the country, both of which encour-
aged foreign direct investment in the
country. Declining prices for the Philip-
pines’ exports in the world market in
the early 1980s, coupled with financial
scandals and reckless borrowing of
government owned financial institu-
tions exasperated the situation.
This gave rise to an economic crisis in
1983. The murder of Senator Benigno
Aquino, the chief rival of the presi-
dent, also resulted in political crisis.
Marco’s government never recovered
from these crises and he ultimately fled
from the country in 1986, giving way to
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Corazon Aquino.
Under President Aquino, the economy
briefly recovered in 1986 but again ran
into difficulties in 1988 due to power
shortages, trade and fiscal deficits
and natural disasters like drought and
earthquake. In the 1980s, the economy
performed poorly and real GNP grew
at an average annual rate of only 1.8%,
while population growth rate was
2.5%. In 1990, the per capita GDP was
only US$715 and unemployment 8.3%.
Aquino tried to revive the economy, but
soon came under the influence of inter-
national creditors and a strong business
community.
Aquino had to deal with two conten-
tious issues. First was the servicing
of an onerous $28 billion debt. Some
economists suggested repudiating the
debt, as it may not have been possible
to both service the debt and revive the
economy. However, repudiation was
rejected by the President due to the
influence of powerful business interests
and creditors. The second issue was land
reforms. Economists believed that distri-
bution of land through reforms was
necessary to give a boost to domestic
demand. However, the government
failed to institute meaningful land
reforms as Congress was dominated by
large landowners.
However, her successor President Fidel
Ramos (1992-98) successfully addressed
many challenges faced by the economy.
The power shortage was overcome
and infrastructure was improved. The
banking system was reformed and
The Philippines is ranked 57th
out of 138 countries for global
competitiveness
monopolies were broken. It was during
this time that electronics companies like
Acer and Intel invested in the Philip-
pines. GDP growth averaged 5% and
inflation came down from 25% to single
digits. The East Asian Financial Crisis
(1997-98) affected the Philippines but
it was able to recover more quickly in
comparison to neighboring economies.
President Joseph Estrada (1998-2001)
revived corruption and cronyism.
However, under President Arroyo (2001-
2010), the economy improved. It was in
this period that exports of electronics
equipment from the Philippines picked
up. Companies like Texas Instruments
Figure 3. Philippines rankings on competitiveness (World Economic Forum)
and Toshiba located operations in the
Philippines, preferring it over China.
The country started exporting disks,
computer parts, and microchips.
GDP grew by more than 5% for three
consecutive years before the Global
Financial Crisis hit the Philippines’
economy in 2008. At that time, two
thirds of overseas sales from the country
was comprised of electronics compo-
nents. The Crisis resulted in reduced
demand for microchips and electronics
components, and the Philippines’
economy suffered badly along with
other East Asian economies. However,
after briefly slowing down in 2009, the
economy grew at an average of 6.2%
annually between 2010 and 2015 under
Benigno Aquino III.
BUSINESS ENVIRONMENT
According to the World Economic
Forum’s Global Competitiveness Report,
the Philippines is ranked 57th out of 138
countries for competitiveness. These
findings reinforce the constraints that
our team has identified within our
Porter Diamond analysis.
Institutions
Institutions are considered weak in the
Philippines, as corruption is a major
problem, public trust in politicians is
low, and the legal system is inefficient.
Investors are poorly protected and
police services are unreliable. Terrorism,
crime, and violence also impose consid-
erable costs on business.
Infrastructure
The quality of roads, railroads, and air
transport is poor.
Macroeconomic Environment
The Philippines has a stable macroeco-
nomic environment, as inflation and the
budget deficit are under control, and
the country’s credit rating is good.

Figure 4. Porter Diamond for Philippines (Team Analysis)
Education
While the Philippines has a large
English-speaking population, the
overall quality of education is low and
the country has no higher education
universities that are globally ranked.
Goods Market Efficiency
Many markets are inefficient in the
Philippines and anti-monopoly policies
are not effective. It takes 29 days to start
a business due to excessive procedures
and customs clearance is difficult.
Financial Market Development
The Philippines lags behind Singapore,
Thailand, India, Indonesia, and Malaysia
GLOBAL COMPE TITIVENESS REPORT | 7
in terms of financial markets develop-
ment.
Technological Innovation
The country is ranked at 83 and 62 for
technological readiness and innovation
respectively. For technological readi-
ness, it is better than Indonesia and
India, but lags behind China, Malaysia,
Singapore and Thailand. It is behind all
these countries in innovation.
COMPOSITION OF ECONOMY
According to the World Bank, agricul-
ture accounts for 10% of the Philippines’
economy, while industry and services
account for 31% and 59% respectively.
Agriculture
In 1980, agriculture comprised 1/4 of
the Philippines’ GDP, with rice, sugar-
cane, bananas, pineapple, coconuts,
corn, fish, eggs, pork and beef being
the main agricultural products. Over
the years agriculture has lost its promi-
nence to services and industry and
now accounts only for 10.3% of GDP
(Prableen Bajpai, 2017). However,
agriculture still employs around 30% of
the labor force.
Industry
The industrial sector has been a major
contributor to the Philippines’ economy.
From 1980 to 2014, it averaged 34% of
GDP. In 2015, it accounted for 30.7%
of the GDP and employs 16% of the
workforce. The electronics industry,
which is the country’s major source
of exports, started in the 1970s and
attracted investment from developed
countries due to the benefit of low cost
production offered by the Philippines.
Services
Services have overtaken the indus-
trial sector in the Philippines, now
accounting for 59% of the GDP and
employing 54% of labor. Within services
there are three major segments:
business process outsourcing, tourism,
and export work services.
Business process outsourcing thrived
in the Philippines due to the English
and technical skills possessed by its
workforce. However, Tourism has not
been able to tap its full potential, and
lags Singapore, Thailand and Malaysia
due to the poorer quality of services
to tourists. Export work services has
become an important segment, as
the remittances from Filipinos in other
countries comprise 10% of GDP.
PRODUCTIVITY
According to the International Labor
Organization, labor productivity in the
Philippines is low compared to China,
Malaysia, Indonesia, Singapore, and
Thailand (ILO, 2017). The Philippines’
productivity has increased by only 22%
over the past 7 years.
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Photo Credit: Singapore Business Times
3. Electronics Cluster
CLUSTER PROFILE
Electronics and electrical equipment (E&E) is a huge global
market, encompassing a range of different products in indus-
tries such as automotive, medical, aerospace, defense, indus-
trial equipment, as well as consumer electronics, communica-
tion, storage and office equipment, and consumer appliances.
According to UN Comtrade, total world exports of electronic
and electrical equipment was approximately US$2.3 trillion
in 2015.
The industry is heavily standardized both in terms of product
and process by engineering bodies such as Institute of
Electrical and Electronics Engineers, or industry standardiza-
tion body such as Electronic Industry Alliance. Such standards
allow for the fragmentation of the manufacturing process, so
that different electronics and electrical components can be
manufactured in different locations. Our report will focus on
the electronics and electrical components sub-sector in the
Philippines.
The type of products in E&E components include passive
electronic components (capacitors and resistors), semiconduc-
tors (wafers, integrated circuits), printed circuit boards, and
transmission and distribution devices (transformers, switch-
gear, storage component). Residing in the middle in the value
chain, the sector receives inputs such as raw materials or more
upstream electronic components, and produces components
that serve either large electronics players downstream (Apple,
Samsung, Sony, etc) that own the marketing, retail and distri-
bution of final products, or original equipment manufacturers
such as Foxconn.
CLUSTER TIMELINE
The industry is highly driven by foreign direct investment,
starting in the early 1970s with investment from Intel. After
the initial wave of investment led by American and European
companies, Japanese companies began their investment in
the mid-1980s, while Korean investments began in the 2000s.
Today, foreign investment in the E&E components account for
almost 72% of the industry.
Foreign companies that invested in the E&E industry mostly
stayed for the long term, with many operations dating back to
the 1970s or 1980s. However, the 2008-2009 global financial
crisis led to lower demand for electronics components. The
lower demand, coupled with the exit of Intel in 2009, impacted
industry growth negatively. However, 110 new investments
were made during 2010-2015, a sign that the industry has
started to recover again.

CLUSTER MAP
Below is the description of each compo-
nent in the cluster map
Figure 5. Timeline of cluster development (Duke University; Team Analysis)
Electronic and electrical compo-
nent manufacturers
At the center of the cluster are the
electronic component manufacturers
themselves. The Semiconductor and
Electronics Industries in the Philip-
pines Foundation (SEIPI) records
membership of 261 companies from
an approximately total number of
firms of 926, which mostly resides in
north western area of Philippines. The
industry employs approximately 2.2
million workers.
Supporting institutions
At the bottom of the map are 4 key
groups of institutions that support the
cluster.
1 . Ed u c at i o n a l i n s t i t u t i o n s
(universities and technical high
schools)
Production workers account for 77%
of total employment (Philippines NSO,
2013). Typically, production workers are
graduates from technical/vocational
high schools that specialize in training
for the electronic and electrical field.
Newly hired workers then undergo
GLOBAL COMPE TITIVENESS REPORT | 9
short training programs (~2 months),
often conducted by the company or the
industry association (SEIPI).
Other than the production workers, the
industry also attracts graduates from
local universities, both engineering
and non-engineering. Several univer-
sities with engineering and manage-
ment program, such as Batangas State
University, Ateneo de Manila University,
Central Luzon State University, Mapua
Institute of Technology, and De La Salle
University serve as talent pools for the
industry.
SEIPI estimates that there are approxi-
mately 500,000 graduates every year
that are readily employable in the
industry. They are competitive, train-
able and usually English proficient
workers[8]. The workers in the industry
enjoy approximately 17% higher
compensation than their peers in other
industries (Philippines NSO, 2013).
2. Research institutions
In 2007, concerned about the lack
of engineering and research talent
among Filipinos, seven deans of the top
engineering programs in the Philippines
established the Engineering Research
and Development for Technologies
(ERDT ). The ERDT is a consortium of
eight universities that provide graduate
level engineering education, focused on
research and development.
Key members of this consor tium
include Ateneo de Manila University
(ADMU), Central Luzon State University
(CLSU), De La Salle University (DLSU),
Mapua Institute of Technology (MIT),
Mindanao State University – Iligan Insti-
tute of Technology (MSU-IIT), University
of the Philippines (U.P.) Diliman, and U.P.
Los Baños and University of San Carlos
(USC).
3. Industry groups
The Semiconductor and Electronics
Industries in the Philippines Founda-
tion (SEIPI) was established in 1984
to promote business interests of
its members, to act as the industry
representative to coordinate with
the Philippines government, and to
enable sharing of knowledge and best
practices among its members. It is now
the largest organization for foreign
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Figure 6. Map of the Philippines’ electronics components manufacturing cluster (Team Analysis)
and local electronics companies in the
Philippines, and is considered the most
organized industry association in the
country.
The organization boasts a total member-
ship of 264 companies, including large
multinationals as well as local Filipino
companies. It provides services in
the areas of Training, Research and
Development, Advocacy, Information,
Networking and Services (T.R.A.I.N.S.)
[13]. It provides industry publications,
industry events, and training program
such as Teen for Work Scholarship
Program (TWSP), which grant schol-
arships and training for high school
graduates to undergo two weeks of
training before being deployed to
electronic companies.
4. Government institutions
Various government institutions
support the industry. Congressional
Commission on Science, Technology
and Engineering (COMSTE), a bicameral
committee created by a joint resolution
of the 13th Congress (starting on July
2004), advance innovative programs
and legislation to improve Philip-
pines’ competitiveness in science and
technology. One of the special panels
in the COMSTE is the electronics and
semiconductor panel. The Philippines
Economic Zone Authority (PEZA),
part of the Department of Trade and
Industry, promotes and administers
the country’s Special Economic Zones,
where many of the electronics manufac-
turers are located.
Design and Firmware
Although still nascent, there is a
growing silicon design and develop-
ment industry in the Philippines (at
the left of the cluster map). The sector
sits higher up in the value chain,
typically requires more technical and
engineering backgrounds, and has a
higher value added than components
manufacturing.
Young (2010) notes that below design
companies are presence in Philippines:
Integrated Circuit design: Applica-
tion Specific Integrated Circuits (ASIC)
and Field Programmable Gate Arrays
(FPGA) design, VHDL (VHSIC Hardware
Description Language) verification,
conducted by companies such as Intel,
Sanyo Semiconductor, Eazix, Symphony,
BItmicro
Integrated Circuit Packaging design,
operated by TI Phils, and Fairchild
Semiconductor
Module and product design, with
companies such as Lexmark, Eazix, Blue
Chip
Firmware: embedded system both
hardware and software, such as Canon
IT and Tsukiden.

Enabling Institutions
Three type of institutions at the top of
the cluster map serve as enabling insti-
tutions for the electronic cluster. Special
Economic Zones (SEZ), operated by
the private sector and/or the govern-
ment, allow manufacturers to start and
operate operations more smoothly.
Most of the factories are located in the
SEZ, and benefits from incentives such
as income tax holidays, tax and duty
Figure 7. Geographic distribution of the cluster (PEZA)
free importation of raw materials, VAT
zero-rating of local purchases, simpli-
fied import-export procedures and
special immigrant and non-immigrant
visa process.
The authority overseeing the SEZ, PEZA,
promises fast turnaround especially
for electronics manufacturing of four
days to complete a production cycle,
consisting of one day of receiving and
custom processing of raw materials, two
days for manufacturing, and one day for
import process.
Being an archipelago, the electronics
GLOBAL COMPE TITIVENESS REPORT | 11
cluster is able to take advantage of
27 major shipping ports operated
under the Philippines Port Authority, a
government-owned enterprise under
the Department of Transportation and
Communications. Private port compa-
nies, such as Harbour Centre Port
Terminal, often also jointly operate
a Special Economic Zone and port,
providing smooth supply chain from
raw materials importing to manufac-
turing to export/shipping.
Although most of the investment in
the electronic components cluster is
Foreign Direct Investment, 28% of the
cluster is comprised of Filipino-owned
enterprises that benefit from financing
provided by various Filipino banks
and financial institutions, such as BDO
Unibank, Metropolitan Bank and Trust
Company (Metrobank), Bank of the
Philippines Island (BPI).
Other Clusters
The electronics component cluster also
benefits from the growing demand of
other clusters, such as the automotive
cluster and the electronic products
cluster. The electronics component
cluster supplies components such as
navigation sensors, automotive wire
and cables, and electric motors to
the automotive cluster in the Philip-
pines. Although the size of automotive
industry is still relatively small compared
to peers, with an annual capacity of only
250,000 units compared to 1.5 million
units in Thailand, the industry still
enjoyed double digit growth in 2015
(27.6%) and 2016 (24.6%).
The finished electronic products
cluster is also a big sector in the Philip-
pines. The sector, which is comprised
of consumer/communication sector,
computer/storage/office equipment,
industr ial equipment, consumer
appliances, and medical equipment,
accounts for US$ 10.5 billion in 2014
export and consists of approximately
320 firms. The sector provides local
demand for the electronic component
cluster, aside from final demand from
final products manufacturers or OEM
plants abroad.
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4. Cluster Competitiveness
HISTORICAL PERFORMANCE
The electronics cluster has been the Philippines’ economic
backbone and icon of economic transformation since the mid
1970’s. Before the growth of the electronics sector, the country
was sustained on exports of agricultural and forestry products
with limited value-add such as coconut oil, copper metal, and
plywood for much of the last century.
Since then, the electronics industry has grown rapidly and has
become the country’s top export with total receipts of $2.47
billion, accounting for 51.6% of the total exports revenue by
2017. Among electronics products, semiconductors constitute
the largest share with 35.9% of total electronics production.
The electronics industry is also an important source of
employment due to its labor-intensive operations. In 2014, the
sector directly employed 344,450 workers through 258 firms
and contributes around 1.9 million indirect jobs. The industry
also is the largest source of FDI in the Philippines due to the
dominance of foreign multinational corporations.
ECONOMIC IMPACT
The multiplier effect of the electronics cluster is also large,
indicating its significant impact on the Philippines’ economy.
According to SEIPI, every 1 peso increase in export sales
Photo Credit: Wikipedia Commons
generates at least 0.12 cents in additional indirect taxes
for the economy and 0.11 cents to 0.25 cents of additional
household income in the economy. Its impact is also high on
employment, with every 1 billion peso increase in investments
creating between 620 to 1,408 additional quality jobs in the
economy.
PERFORMANCE CHALLENGES
Despite a significant growth in share of electronics exports
from 22% in 1991 to 42% in 2014, the Philippines’ cluster’s
growth has been unimpressive compared with the world rate.
The cluster has shown a negative export CAGR of -2% since
2007, compared to a world rate of 4%.
During this period, exports suffered from economic crisis of
2008, followed by Intel’s exit from the Philippines. According to
the Philippines Statistics Authority (PSA), the cluster’s export
earnings fell from a peak of $32.2bn, or 21.6% of GDP, in 2007
to $26.6bn, or 9.8% of GDP, in 2013. However, an improving
investment climate and strengthening global demand has
helped the industry pick up again since 2014.
In addition, the cluser’s low value add focus is suppressing
the potential growth of the industry. According to the PSA,
the sector produced just $8 billion of gross value added in

2014, or 2.8% of GDP. That was up
from $7.4billion, or 2.9% of GDP, in
2013 and $7.3 billion, or 3.1% of GDP,
in 2012. Philippines is heavily focused
on back-end testing and assembly,
lacking the manufacturing capability
for semiconductor wafer fabrication,
which is a major step in moving up the
value chain.
Figure 8. Trends in electronics exports (Credit Suisse)
Although SEIPI identifies several indus-
tries such as Medical/Industrial Instru-
mentation, Automotive, Consumer
Electronics and Office Equipment that
have high growth potential, no action
has been taken by the government. In
practice, most of the value add within
the electronics sector derives from
semiconductor research
and chip design that does
not exist in the Philippines.
Currently, IC design, wafer
fabrication, and R&D in
the upstream section are
considered as the largest
gap in electronics produc-
tion value add. Lack of diver-
sification in manufacturing
in the downstream sector
is also contributing to the
lack of competitiveness in
the electronics industry.
Constraining the develop-
ment of both upstream
and downstream activi-
ties are the lack of a highly
sk illed wor kforce, high
GLOBAL COMPE TITIVENESS REPORT | 13
power costs, lack of technological and Asian Competition
product innovation, lack of financing, Most competition for the cluster
and limited SME product development comes from Asia. The world super star
initiatives. performers among electronics compo-
nents exporters are China/Hong Kong
RELATIVE COMPETITIVENESS and South Korea, while other exporters
The Philippines’ share in global exports from Asia such as Malaysia and Thailand
is being threatened by the high cost have performed significantly better
of production, lack of infrastructure than the Philippines. With rising costs
coupled, and absence of product diver- in the Philippines, threats may increase
sification. from Vietnam or other countries that
Th e co u n t r y ’s offer lower labor costs.
electronics
export accounts Furthermore, the structural shift away
for just 1% of from PCs towards smartphones and
global E&E tablets may explain why Taiwan and
exports in 2014, South Korea are performing better than
while the top Southeast Asian countries in electronic
ten electronics exports. The poor performance of the
producers Filipino and Singaporan electronics
comprise 79% of clusters is driven by a greater focus on
the global total. slower growing sectors such as hard
disks, PCs, and semiconductor produc-
SEIPI has identi- tion. According to Credit Suisse, tablets
fied a deterio- and smartphones will continue to
rating trade off be the drivers of growth in electronic
between costs and shipments. This may be a negative sign
productivity that for the future growth prospects of the
provides a chance for new players, such Philippines’ electronic industry.
as Vietnam, to enter the market. Among
the major constraints pressuring Value Add
competitiveness, poor infrastructure, The Philippines has significantly lagged
especially the slow pace and high cost behind its Asian peers due to a relative
of moving goods, ranked as the highest lack of value added production.
concern among investors.
In particular, other Southeast Asian
Figure 9. Shifts in end-product demand (Credit Suisse)
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Figure 10. Comparison Table of Electronics Manufacturing Clusters in Asia (Team Analysis)

clusters have been helped by their
home governments dedicating signifi-
cant effort in policy and financing to
support value add in local electronics
production.
Electronics clusters in Malaysia, Singa-
pore, Taiwan and Thailand benefit
from local semiconductor production,
functional upgrading to chip design,
and linkage of backwards production.
As a result, product mixes are more
diversified for these countries, allowing
them to win higher global market
shares than that of the Philippines.
The governments of Malaysia, Vietnam,
Taiwan and Thailand also concentrate
heavily on localizing R&D for domestic
producers, attracting investment in
high value add products via favorable
tax and regulatory incentives, and
developing local talent by involving
domestic universities and schools.
Such government policy has been less
present in the Philippines. In addition,
foreign investors may increasingly
shift their focus from the Philippines to
Vietnam for labor-intensive electronics
manufacturing.
Therefore, the Philippines’ competitive
advantage in its current product mix is
at risk from other competing clusters,
suggesting that the Philippines will
have to move up the value chain in
order to preserve the viability of its
electronics manufacturing cluster.

Figure 11. Competitiveness assessment of selected cluster by product (Credit Suisse)

 GLOBAL COMPE TITIVENESS REPORT | 15

Finally, the Philippines needs to
improve its macroeconomic and polit-
ical environment to increase its compet-
itiveness. Given the ASEAN region has
similarities in product mix across the
electronics sector, the macro environ-
ment of each country plays an impor-
tant role in shape their competitiveness
in attracting companies and talent.
COMPETITIVENESS ASSESSMENT
The Philippines’ share of global
electronics component exports was
stagnant between 2007 and 2014, while
China was able to increase its share in
the sector from 21% to 31% over the
same time period. More worryingly, the
overall size of the Philippines’ compo-
nents exports did not grow between
2007 and 2014, matching only France in
terms of poor performance and lagging
behind other Asian countries that were
able to grow their component exports
between 3 and 5%.
The Philippines has also been able to
maintain a low cost position relative
to other major global electronics
producers. The Philippines’ hourly
compensation costs within the
computer, electronic, and optical
products sector is still one of the lowest
levels in the world, alongside China
and India. Moreover, this data masks
the large rates of wage growth that has
occurred in China’s coastal areas, which
has historically been China’s hotbed of
electronics manufacturing.
However, while this low cost position
has historically allowed the Philip-
pines to attract foreign investment in
the past, it may be not a sign of true
cluster competitiveness in the future.
This is particularly true if the Philip-
pines wants to retain the high quality
engineering and business management
talent needed to move to higher value
parts of the supply chain.
2. Competence of the Philippine
Export Zone Authority (PEZA)
Most foreign investors have located
their manufacturing plants in the
Philippines’ special economic zones
(SEZs), due to the lower overall costs
of manufacturing and greater ease
of doing business. These SEZs are
managed by the Philippine Export Zone
Authority (PEZA), which has been rated
by foreign investors in a Duke Univer-
sity survey as being responsive to their
needs and organizationally stable, a
critical consideration for investors. This
has encouraged foreign companies to

This poor performance suggests that

the Philippines’ electronics compo-
nents manufacturing cluster will have to
think carefully about how to redefine its
global value proposition, particularly as
the historical drivers of growth may be
changing in the future given the high
level of innovation and competitiveness
in other competing clusters.

CLUSTER STRENGTHS
1. Low Cost, English-speaking
Workforce
The electronic components cluster
began in the Philippines as foreign
multinationals searched for low-cost
production centers that could slot easily
into their global supply chains. This low
cost, ready supply of relatively produc-
tive labor remains a key attraction for
investors.

For front-line production workers,

foreign companies surveyed by Duke
University cite English language skills,
stability and availability of supply, low
cost, loyalty (low turnover rates), and
openness to training as being core
advantages of hiring Filipino workers.
Figure 12. Labor cost comparison by country (US Bureau of Labor Statistics)
1 6 | P H I L I P P I N E S E L E C T R O N I C C O M P O N E N T S M A N U FA C T U R I N G
continue expanding their operations
in the Philippines, which has led to
sustained growth in both exports and
employment in the SEZs.
3. Geographical concentration
90% of the electronics manufacturing
cluster is located in just two geographi-
cally close areas, Metro Manila and
Calabrazon. This geographical concen-
tration gives the Philippines cluster the
potential to gain from the benefits of
agglomeration in diffusing knowledge
and experience.
90% of firms
located in
just 2 areas
The highly foreign composition of the
Philippines electronics cluster may also
generate unexpected agglomeration
benefits, since PEZA has also found that
it is common for firms from the same
country to cluster in the same industrial
park.
3. May benefit from ASEAN
regional integration and shift of
electronics demand to Asia
There is an increasing shift towards
regional instead of global
manufac turing chains
as demand for finished
electronics increases in
Asia. M oreover, there
continues to be progress
t o w a rd s h a r m o n i z i n g
trade tariffs and removing
barriers as part of the
(albeit slow) efforts to
create a common ASEAN
economic community.
This may create an oppor-
tunity for the Philippines
to capture manufacturing share from
China in the future as Chinese living
standards and wage levels continue to
rise, particularly within the lower value
added segments of the value chain that
Chinese firms may increasingly exit or
outsource.
The Philippines is potentially well
placed to benefit from this trend, as 61%
of its component are already exported
regionally within East Asia.
Furthermore, integration can help
generate major productivity gains in
the cluster. The McKinsey Global Insti-
tute estimates that manufacturing scale
benefits, inventory efficiencies, and
logistics cost reductions from regional
trade integration can help drive cost
savings and productivity gains between
10-20% of the total cost base in the
electronics sector.
CLUSTER WEAKNESSES
1. Brain drain of enginneering
and management talent
Companies in the cluster surveyed by
Duke University’s Center on Globaliza-
tion, Governance & Competitiveness
are particularly concerned about their
ability to retain engineers with 3+ years
of experience, as once engineers gain
experience, they are inclined to go
abroad for higher wages.
Highly skilled engineers typically
accounted for between 8-12% of
the overall workforce in electronics
manufacturing. While this is a relatively
small proportion of the total labor force,
Figure 13. Export Destinations for Philippines electronics
components exports (Duke University)
engineers are key drivers for produc-
tivity and value added innovation.
High turnover for skilled engineers
that have just gained enough experi-
ence to be truly productive hurts both
individual companies and the cluster
as a whole, as companies may become
reluctant to invest in training and
supporting their staff.
This vicious brain drain cycle also makes
it difficult for the country to retain its
most talented engineers and business
managers, potentially constraining the
country’s ability to increase manufac-
turing productivity, grow domestic
businesses, and move up in the value
chain.
This cycle also tends to self-perpetuate
and reinforce itself, as a shortage of top
talent hinders the ability of the Philip-
pines to produce the high quality jobs
that would keep these highly mobile
top performers in the country.
2. Low tech, low productivity
Most manufacturing operations in the
cluster are focused on low produc-
t i v i t y, l a b o r- i n te n s i ve m a n u f a c -
turing processes. There is significant
scope to implement better manage-
ment practices, data analytics, and
technology to increase the productivity
of many Filipino electronics manufac-
turing plants. However, McKinsey notes
that a key constraint on the Philippines’
ability to implement these productivity-
enhancing business improvements
is the skills gap in areas such as data
analytics, management, and technology
personnel that can think strategically.

3. Weak brand & perception
The low tech nature of the Philippines’
cluster also leads to a self-fulfilling cycle
in which firms regard the country as an
ideal location for lower tier produc-
tion, but as unsuitable for higher value
added manufacturing.
Of the three main players in the
electronics value chain – lead firms,
contract manufacturers, and compo-
nent suppliers – more than 67% of
Filipino firms are in the less value added
component supply part of the chain
according to Duke University.
Philippines
regarded
as Tier 3
producer
The contract and components manufac-
turing space is divided into 3 main tiers
in terms of value added complexity and
production capabilities, with competing
clusters in China being in Tier 1, and
Malaysia and Thailand occupying Tier 2.
The Philippines is seen as participating
in Tier 3, alongside other low value
added locations such as Indonesia,
Vietnam, and Myanmar.
67% of Filipino firms are in the less
value added component supply part
of the chain
This weak country brand perception
may hinder the Philippines’ ability to
attract higher value added investment,
as foreign multinationals may only view
the country as a suitable investment
destination for low cost outsourcing,
and not as a potential center for more
value added business processes.
GLOBAL COMPE TITIVENESS REPORT | 17
This sentiment can be seen in a 2014
McKinsey survey of foreign investors
within major sectors on how different
manufacturing clusters in South-
east Asia rank on “Cost” and “Quality”.
Respondents consistently rated the
Philippines highly in terms of “Cost”, but
rarely in terms of “Quality”.
This leads to a low weighted average in
which other destinations within South-
east Asia appear more attractive than
the Philippines to investors looking to
locate operations that will require more
capabilities than just low cost.
4. Weak supplier base and
linkages to non-manufacturing
segments
The local Filipino supporting industries
that contribute to the components
manufacturing cluster tend to be small,
unproductive, and poorly managed.
While the foreign multinational compa-
nies at the core of the cluster are large
and have global management practices,
local Filipino suppliers tend to be
predominately small and with have
investment in technology, automation,
or managerial talent.
This constrains the ability of the country
to reap all the potential benefits from
attracting so much foreign investment,
and hinders the ability of the cluster to
move to more advanced manufacturing
in the future.
5. Reliant on “branch” plants of
foreign multinationals
It will be also difficult for the Philippines
to actively move towards a higher value
add value chain position when 72% of
the industry is comprised of subsidiaries
of large multinational firms, which may
have little strategic control.
As lower value added “branch” plants,
most of the foreign operations in the
Philippines have their operational
direction set by managers in corporate
headquarters, who have little incentive
to consider the future viability of the
Philippines cluster as a whole.
This lack of local plant autonomy may
also make it difficult for the Filipino
government to coax or incentivize
companies to move to higher value
added sectors upstream or increase
local productivity, as there are few clear
cluster leaders to champion reform
efforts.
6. Government policies have
been poorly implemented
The Philippines routinely ranks low
on global indicators for ease of doing
business and political institutional
strength. Deloitte has identified
numerous areas in which the Philip-
pines government can reduce corrup-
tion, and the World Bank’s Ease of Doing
Business report highlights how the
Philippines trails other Southeast Asian
countries on key criteria that foreign
investors look at.
Unfortunately, the Philippines’ govern-
ment has made little progress in driving
improvement in many of these core
problems. Over the past 5 years, the
Philippines has made marginal progress
in improving the ability of companies
to get credit. However, there has been
almost no improvement in starting a
business, getting electricity, getting
permits, protecting minority investors,
paying taxes, trading across borders, or
enforcing contracts.
The government’s lack of progress on
improving the local business environ-
ment is particularly poignant given the
increasing competitiveness of other
investment destinations in Southeast
Asia. This inability to improve relative
to its peers may thus hinder the Philip-
pines’ ability to improve its electronics
manufacturing cluster in the future.
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5. Recommendations
1. Improve value add by attracting
talent and smart investment
The Philippines currently produces low
value added electronics components. The
electronics cluster needs to move to the next
stage of higher value added products, which
will require a greater number of highly trained
engineers and technicians.
Additionally, market demands are shifting to
handheld electronics product such as cellular
phones and tablets, while the Philippines
electronic cluster is still producing compo-
nents for desktop computers and appliances.
The cluster should make an active effort to
shift to producing for faster growing end
sectors.
For the government
The government should try to attract highly
skilled Filipino engineers and technicians
working abroad, and provide incentives to
retain them in the country.
The government should focus on centers of
excellence in local universities to promote
research and development.
The government should allocate a higher R&D
budget for electronics. It can also provide tax
incentives for R&D.
The government should invite leading multi-
nationals to invest in R&D in the Philippines
through incentives, such as tax incentives for
opening new R&D centers in the Philippines
and simplify administrative process for highly
skilled engineers to work in the Philippines.
The govenrment should encourage the devel-
opment of local suppliers via incentives such
as lower tax for companies with a certain
percentage of local content, tax holidays for
local suppliers in the early years of opera-
tion, and connecting local suppliers to other
advance suppliers via bilateral collaborations.
For the cluster
The cluster should invest more in human
capital. This can be through providing training
or exchange programs with partner compa-
nies abroad.
The cluster should invest more in R&D via
collaboration with educational institutions
such as the Engineering Research and Devel-
opment for Technologies (ERDT).
The cluster should actively build a guiding
coalition of 7-10 key players to spearhead the
effort of moving up in the value chain and
shifting to faster growing end products.
2. Improve perception of the cluster
The Philippines’ electronic cluster consists
mainly of Tier 3 suppliers, producing only
components for other OEM and final product
manufacturers with no brand recognition. As a
 GLOBAL COMPE TITIVENESS REPORT | 19

result, they are easily replaceable. To address this issue, the cluster
in collaboration with the government, should focus on changing
the perception of the the Philippines “brand”.

For the government

The government should actively support the clusters’ effort in
brand building by assisting in international trade shows and inter-
national efforts to promote the Philippines’ brand

For the cluster

The cluster should invest in brand building and marketing, poten-
tially using funding from the government.

3. Improve business environment through better

government delivery
The Philippines’ poor business environment factors, such as its
high corporate tax rate, inefficient bureaucracy, and underdevel-
oped infrastructure, make the country less attractive to investors
compared to its peeres in Southeast Asia. A key reason for this
has been the government’s inability to deliver on its promises of
improved service delivery for the cluster. Improving government
service delivery can thus be a key way to help the cluster regain
competitiveness.

For the government

The government should reduce the amount of cluster initiatives it
has proposed in order to focus and prioritize on key issues, particu-
larly regarding talent retention and the ease of doing business.

The government should focus on improving service delivery by

taking lessons from the UK Delivery Unit and Indonesia’s reform
of its Investment Board on how to make the government delivery
chain more effective.

The government should continue to pursue structural reforms

over the medium term, such as shortening the processing time
for permits, ensuring law enforcement, and reducing the burden
of tax compliance.

Photo Credit: Wikipedia Commons

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Deloitte. Competitiveness: Catching the Next Wave in the Philippines (2014)

Duke Center on Globalization, Governance & Competitiveness. “The Philippines in the Electronic and Electrical Value Chain.”
Center on Globalization, Governance & Competitiveness, Duke University (May 2016)

The Economist. “A guide to the Philippines’ history, economy and politics “ (2016)

Hays, J. “Economic History of the Philippines”, (2017)

International Labor Organization. “ILOSTAT”, (2017)

Lachicha, Dan. “Electronics industry roadmap”. Presentation (August 6, 2015)

McKinsey & Company. Understanding ASEAN: The manufacturing opportunity. (2014)

Presentation on “Industry Roadmaps and the AEC Game Plan: Regional Localization for Competitiveness”, Semiconductor and
Electronics Industries in the Philippines (August, 2015)

Philippines Board of Investments, “2014 INVESTMENT PRIORITIES PLAN INDUSTRY DEVELOPMENT FOR INCLUSIVE GROWTH”,
(October, 2014)

Philippines Export Zone Authority (2004)

Philippines NSO (2013)

Prableen Bajpai, C. “Emerging Markets: Analyzing The Philippines’ GDP”, (2016)

Oliver Tonby Jonathan Ng Matteo Mancini, “Understanding ASEAN: Manufacturing opportunity”, McKinsey & Company (October,
2014)

Reyes-Macasaquit, M. (2010), “Case Study of the Electronics Industry in the Philippines: Linkages and Innovation’, in Intarakum-
nerd”, P. (ed.), Fostering Production and Science and Technology Linkages to Stimulates Innovation in ASEAN. (2009)

Ernie B.Santiego, “About the Philippine Electronics Industry”, Semiconductor and Electronics Industries in the Philippines (2008)

Ernie B.Santiego, “Development of ASEAN framework for trade negotiations, Electronics Industry”, Semiconductor and Electronics
Industries in the Philippines (March, 2007)

World Bank. “Ease of Doing Business Report” (2016)

World Bank. “World Development Indicators” (2017)

World Economic Forum. “Global Competitiveness Report 2016-17” (2016)

Young, Arthur. “The Philippines electronic industry”. Presentation (June 11, 2010)